Frugal life on Social Security? You may have more than you think
New report shows most can increase spending slightly once benefits begin
Get rid of that notion that retirement must be a time to cut costs and pinch pennies. Rather, plenty of people seem to be in a position to splurge a bit after claiming Social Security benefits.
Most people are able to maintain or increase their spending slightly once they start receiving retirement benefits, according to a new report by economists at the Investment Company Institute and the Internal Revenue Service. The study, which analyzed tax data from 1999 to 2010, found that the typical worker had about 3% more after-tax spendable income after claiming Social Security benefits than before — and the lowest-income people had 29% more on average.
Social Security combined with other retirement sources such as 401(k) plans and Individual Retirement Accounts thus provide “substantial income” for many people and more than is commonly assumed, the report said.
The researchers compared spendable income reported by people on their tax returns during the year before they first claimed Social Security benefits, while still working, and three years after they claimed. Spendable income was defined as that from jobs, Social Security benefits and other retirement sources. It increased for more than half of taxpayers over the comparison period.
In fact, more retirees received income from multiple sources than is commonly reported, said Peter Brady, an economist at the institute who was part of the research team. He said this indicates government data understates income for retirees. MORE DELAY BENEFITS
More people seem willing to delay claiming Social Security payments rather than grab the money as early as possible, at age 62. So says Fidelity Investments, which found that 28% of people at age 61 plan to claim the benefits at 62, down from 45% in a similar poll conducted in 2008, when the economy was in recession and more Americans were struggling. Delayed claiming translates into higher benefits.
“Deciding when to start taking your Social Security benefits is one of the most important retirement planning decisions we face,” said Ken Hevert, a Fidelity senior vice president, in a statement. Factors affecting the decision include a person’s financial situation, health, lifestyle and longevity expectations.
The delay mentality also was evident for other age groups. Overall, 21% of preretirees said they would claim Social Security as early as possible, compared to 27% who said so in 2008.
The age most people plan to start collecting is 67. The improving economic backdrop likely explains much of the shift, Fidelity said.
But one aspect that has remained the same is the way people plan to use Social Security retirement benefits. In both the latest survey and in 2008, about four in five respondents said they would spend the money on basic living expenses.
In its survey, Fidelity said it uncovered broad public misconceptions about Social Security, including in these areas:
No “do-overs.” Once a person claims Social Security benefits, the decision can’t be altered later. According to the survey, more than one in three respondents inaccurately assumed they could claim benefits at an early age then claim them later to push up their income. Advance notice required. Nearly two in three respondents didn’t realize that people must
apply for Social Security bene- fits three months before it starts. One in 11 incorrectly expect to be contacted by the Social Security Administration when they reach a claiming age. Impact of ex-spouses. Half the respondents in Fidelity’s poll inaccurately thought their own benefits would be cut if a former husband or wife made a claim on them. Rather, people who were married for at least 10 consecutive years and haven’t remarried are entitled to their own benefits or 50% of a former spouse’s, whichever is higher. This claim, if made, won’t reduce the former spouse’s benefits and that person doesn’t even need to be notified, Fidelity said.
People still in the workforce express less confidence about the future of Social Security than retirees do.
Just 37% of workers say they’re very or somewhat optimistic that Social Security benefits will roughly approximate the value of benefits currently received by retirees, according to a survey by the Employee Benefit Research Institute.
That compares to 52% of retirees who are very or somewhat optimistic about future Social
Security benefits.
“Deciding when to start taking your Social Security benefits is one of the most important retirement planning decisions we face.” Ken Hevert, a Fidelity senior vice president